Value of information in portfolio selection, with a Taiwan stock market application illustration

Chiang Kao, Ralph E. Steuer

Research output: Contribution to journalArticle

6 Citations (Scopus)

Abstract

Despite many proposed alternatives, the predominant model in portfolio selection is still mean-variance. However, the main weakness of the mean-variance model is in the specification of the expected returns of the individual securities involved. If this process is not accurate, the allocations of capital to the different securities will in almost all certainty be incorrect. If, however, this process can be made accurate, then correct allocations can be made, and the additional expected return following from this is the value of information. This paper thus proposes a methodology to calculate the value of information. A related idea of a level of disappointment is also shown. How value of information calculations can be important in helping a mutual fund settle on how much to set aside for research is discussed in reference to a Taiwan Stock Exchange illustrative application in which the value of information appears to be substantial. Heavy use is made of parametric quadratic programming to keep computation times down for the methodology.

Original languageEnglish
Pages (from-to)418-427
Number of pages10
JournalEuropean Journal of Operational Research
Volume253
Issue number2
DOIs
Publication statusPublished - 2016 Sep 1

Fingerprint

Value of Information
Portfolio Selection
Taiwan
Stock Market
Quadratic programming
Parametric Programming
Specifications
Methodology
Quadratic Programming
Specification
Calculate
Financial markets
Portfolio selection
Value of information
Taiwan stock market
Alternatives
Model
Expected returns

All Science Journal Classification (ASJC) codes

  • Modelling and Simulation
  • Management Science and Operations Research
  • Information Systems and Management

Cite this

@article{09367b22ec994f21a027cdf5c9b35fe8,
title = "Value of information in portfolio selection, with a Taiwan stock market application illustration",
abstract = "Despite many proposed alternatives, the predominant model in portfolio selection is still mean-variance. However, the main weakness of the mean-variance model is in the specification of the expected returns of the individual securities involved. If this process is not accurate, the allocations of capital to the different securities will in almost all certainty be incorrect. If, however, this process can be made accurate, then correct allocations can be made, and the additional expected return following from this is the value of information. This paper thus proposes a methodology to calculate the value of information. A related idea of a level of disappointment is also shown. How value of information calculations can be important in helping a mutual fund settle on how much to set aside for research is discussed in reference to a Taiwan Stock Exchange illustrative application in which the value of information appears to be substantial. Heavy use is made of parametric quadratic programming to keep computation times down for the methodology.",
author = "Chiang Kao and Steuer, {Ralph E.}",
year = "2016",
month = "9",
day = "1",
doi = "10.1016/j.ejor.2016.02.011",
language = "English",
volume = "253",
pages = "418--427",
journal = "European Journal of Operational Research",
issn = "0377-2217",
publisher = "Elsevier",
number = "2",

}

Value of information in portfolio selection, with a Taiwan stock market application illustration. / Kao, Chiang; Steuer, Ralph E.

In: European Journal of Operational Research, Vol. 253, No. 2, 01.09.2016, p. 418-427.

Research output: Contribution to journalArticle

TY - JOUR

T1 - Value of information in portfolio selection, with a Taiwan stock market application illustration

AU - Kao, Chiang

AU - Steuer, Ralph E.

PY - 2016/9/1

Y1 - 2016/9/1

N2 - Despite many proposed alternatives, the predominant model in portfolio selection is still mean-variance. However, the main weakness of the mean-variance model is in the specification of the expected returns of the individual securities involved. If this process is not accurate, the allocations of capital to the different securities will in almost all certainty be incorrect. If, however, this process can be made accurate, then correct allocations can be made, and the additional expected return following from this is the value of information. This paper thus proposes a methodology to calculate the value of information. A related idea of a level of disappointment is also shown. How value of information calculations can be important in helping a mutual fund settle on how much to set aside for research is discussed in reference to a Taiwan Stock Exchange illustrative application in which the value of information appears to be substantial. Heavy use is made of parametric quadratic programming to keep computation times down for the methodology.

AB - Despite many proposed alternatives, the predominant model in portfolio selection is still mean-variance. However, the main weakness of the mean-variance model is in the specification of the expected returns of the individual securities involved. If this process is not accurate, the allocations of capital to the different securities will in almost all certainty be incorrect. If, however, this process can be made accurate, then correct allocations can be made, and the additional expected return following from this is the value of information. This paper thus proposes a methodology to calculate the value of information. A related idea of a level of disappointment is also shown. How value of information calculations can be important in helping a mutual fund settle on how much to set aside for research is discussed in reference to a Taiwan Stock Exchange illustrative application in which the value of information appears to be substantial. Heavy use is made of parametric quadratic programming to keep computation times down for the methodology.

UR - http://www.scopus.com/inward/record.url?scp=84977989282&partnerID=8YFLogxK

UR - http://www.scopus.com/inward/citedby.url?scp=84977989282&partnerID=8YFLogxK

U2 - 10.1016/j.ejor.2016.02.011

DO - 10.1016/j.ejor.2016.02.011

M3 - Article

AN - SCOPUS:84977989282

VL - 253

SP - 418

EP - 427

JO - European Journal of Operational Research

JF - European Journal of Operational Research

SN - 0377-2217

IS - 2

ER -